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Edited by Philip Arestis and Malcolm Sawyer
Chapter 4: The Endogeneity of Money: Empirical Evidence
Peter Howells 1. Introduction Any survey of empirical work on the endogeneity of money faces a fundamental problem of where to draw the line. Take the easy case ﬁrst. We could conﬁne our attention to works that select themselves because their author(s) present them as such. Alternatively, we could use the fact that ‘Endogenous money theory is one of the main cornerstones of post-Keynesian economics’ (Fontana, 2003, p. 291) to select on the basis of work which has been published in post-Keynesian, or otherwise sympathetic, contexts. Either approach would draw the line in a broadly similar position. The problem with this approach is that monetary policy is inevitably pragmatic. Policy must confront what is, even if macroeconomic textbooks continue with the ﬁction that central banks target the money stock directly (exploiting a mechanical relationship between bank reserves and deposits) and that monetary policy ‘shocks’ must always work through real-balance eﬀects.1 By contrast, we know that central banks set the rate of interest and allow reserves and deposits to be demand-determined, because they have been telling us so for many years: ‘in the real-world banks extend credit, creating deposits in the process, and look for the reserves later’ (Holmes, 1969, p. 73); and, more recently: ‘In the United Kingdom, money is endogenous – the Bank supplies base money on demand at its prevailing interest rate and broad money is created by the banking system’ (King, 1994, p. 264).2 The same message comes from the ‘new consensus’ view on...
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